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Midterm I Review

Midterm I Review - I-Trade Midterm Review Introductions and...

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I-Trade Midterm Review February 14, 2008 Introductions and the Pattern of Trade *see slides Gravity Model o Factors Affecting Trade Distance Cultural Affinity (ex: Portugal and Mozambique) Geography Multinational corporations Borders (tariffs, different languages and currencies) o T ij =A*Y i *Y j /D ij T ij =value of trade between country i and country J A=constant Y y =GDP country i Y j - GDP country j D ij -distance between country i and country j o Trade agreements: intended to increase trade by reducing transaction costs such as tariffs o Two Waves of Globalization 1800-1914 1945- Present o Changing composition of trade Example: In the US, agriculture manufacturing o Outsourcing INCREASES the amount of trade Fragmentation o *Article: “Trouble with Trade”- Paul Krugman, Dec 28 NYT Technological Differences: The Ricardian Model PPF diagram Ricardian Model : differences in productivity of labor between countries cause productive difference, leading to gains from trade o Differences in productivity are usually explained by differences in technology o *Difference from H-O model Opportunity Costs: Measures the cost of not being able to produce something else o Example: A country has a limited number of workers that can be employed to produce either roses or computers **See notes Comparative Advantage: A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries o A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to
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producing other good (Specialization) One-Factor Ricardian Model o Assumptions: Labor is the only resource important for production Labor productivity varies across countries, usually due to differences in technology, but labor productivity in each country is constant across time The Supply of labor in each country is constant Only two goods are important for production and consumption: wine and cheese Competition allows laborers to be paid a “competitive” wage, a function of their productivity and the price of the good that they can sell, and allows laborers to work in the industry that pays the highest wage w=MP L *P Only two countries are modeled: domestic and foreign o Unit Labor Requirements a LW : unit labor requirement for wine in the domestic country, i.e., if a LW =2 then it takes 2 hours of labor to produce one liter of wine in the domestic country a LC : unit labor requirement for cheese in the domestic country,i.e., if a LW = 1 then it takes 1 hour of labor to produce on kg of cheese in the domestic country High unit of labor requirement implies low labor productivity o L: total number of hours worked in the domestic country (constant) o Production Possibility Frontier (PPF) o *** o WITHOUT trade, relative price of a good equals the opportunity cost
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Midterm I Review - I-Trade Midterm Review Introductions and...

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